1965 Soviet economic reform

The 1965 Soviet economic reform, sometimes called the Kosygin reform or Liberman reform, were a set of planned changes in the economy of the Soviet Union (USSR). A centerpiece of these changes was the introduction of profitability and sales as the two key indicators of enterprise success. Some of an enterprise's profits would go to three funds, used to reward workers and expand operations; most would go to the central budget.

The reforms were introduced politically by Alexei Kosygin—who had just become Premier of the Soviet Union following the removal of Nikita Khrushchev—and ratified by the Central Committee in September 1965. They reflected some long-simmering wishes of the USSR's mathematically oriented elite planners, and initiated the shift towards a more decentralized economic planning process.

Under Lenin, the New Economic Policy had allowed and used the concepts of profit and incentives for regulation of the Soviet economy. Stalin transformed this policy rapidly with the collectivization of farms and the acceleration of central planning—as exemplified by "Five-Year Plans". Since about 1930, the Soviet Union had used a centralized system to manage its economy. In this system, a single bureaucracy created economic plans, which assigned workers to jobs, set wages, dictated resource allocation, established the levels of trade with other countries, and planned the course of technological progress. Retail prices for consumer goods were fixed at levels intended to clear the market. The prices of wholesale goods were fixed, also, but these served an accounting function more than a market mechanism. Collective farms also paid centrally determined prices for the supplies they needed, and unlike other sectors their workers received wages directly dependent on the profitability of the operation.

Although Soviet enterprises were theoretically governed by the principle of khozraschet ("accountability")—which required them to meet planners' expectations within the system of set prices for their inputs and outputs—they had little control over the biggest decisions affecting their operations. Managers did have a responsibility to plan future gross output, which they chronically underestimated in order to later exceed the prediction. The managers then received bonuses (premia) for surplus product regardless of whether it was produced in a cost-effective manner or whether their enterprise was profitable overall. The bonuses for output came in amounts sometimes equal to the managers' basic salaries. The system also incentivized pointless increases in the size, weight, and cost of production outputs, simply because 'more' had been produced.

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